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Enlightenment Through Understanding

Economic Myths, Part 4: Job Creation is Good

October 7, 2015

Dyseconomics, developed in 2011, describes how an economic system that is optimal for growth and technological expansion is one where, counterintuitively, the economic contributions of the majority of individuals goes to zero relative to the size of the overall economy, a version of the Pareto Principle as applied to macroeconomics. It also describes the counterintuitive nature of economics, in that what is ‘bad’ for the economy is sometimes ‘good’ for the individual, for example: the paradox of thrift. Some of the rules of modern macroeconomics almost seem conceived from a dystopian sci fi book.

For example, wealthiest 20% contributes 80% to consumer spending, while the poorest 20% contributes just 1.5%:

Of course, America’s poorest are, relatively speaking, much richer than the world’s poorest, but the Pareto Principle holds.

The future is an economy where economic contributions are increasingly concentrated among a shrinking minority – the cognitive and financial elite.

This is related to the labor market in that strong job creation may actually be a negative for the economy by creating inflation and spurring the fed to tighten monetary policy too soon. This implies that there are millions of people (predominantly of low or average IQs) who, economically speaking, create more value being unemployed, which keeps rates low, than working – a kinda cynical, dystopian economic reality. This is evidenced by how stocks surged 2% on Friday despite the weak payroll number in which only 142,000 non-farm jobs were created for September, far below the estimates of over 200,000. Bad news becomes good news because weak job creation means rate hikes will be delayed.

This is corroborated by research that shows that rising unemployment is bullish for bonds and stocks.

We find that on average an announcement of rising unemployment is “good
news” for stocks during economic expansions and “bad news” during economic
contractions. Unemployment news bundles three types of primitive information
relevant for valuing stocks: information about future interest rates, equity risk
premium, and corporate earnings and dividends. The nature of the information
bundle — and hence the relative importance of the three effects — changes over
time depending on the state of the economy. For stocks as a group, information
about interest rates dominates during expansions and information about future
corporate dividends and/or the equity risk premium dominates during
contractions.

But, obviously, if the labor market worsens too much, the economy will go into recession, so there is a ‘sweet spot’ of not too much growth and no deflation. But, on the other hand, the labor force participation has been falling for decades, yet due to the Pareto Principle and globalization, consumer spending remains robust – another counterintuitive empirical observation in macroeconomics.

Men are leaving the workforce, yet consumer spending and exports keep going up:

This is probably why Wall St. is not losing too much sleep over job creation weakness, provided that the weakness does not become a full-blown recession. Even with a shrinking middle class, the economy as measured by data like profits & earnings keeps humming along. This is why liberals, who insist that without a middle class the economy is doomed, are wrong; instead, the composition of the labor market will change to one of fewer salaried jobs and more gig and temp jobs.